A ruling by Massachusetts' highest court Friday repudiating a widespread securitization practice could scuttle other foreclosure cases statewide and may portend similar blows to the industry elsewhere.
The Supreme Judicial Court of Massachusetts
"This is the first court to say directly, 'it doesn't matter if there are large dollars involved or if it is convenient to ignore governing laws. You are bound to the laws just like the rest of us are,'" said Paul Collier, a Cambridge lawyer who represented the homeowners in the case.
In a research note Friday, Miller Tabak + Co. LLC, a brokerage firm in Boston, wrote to its clients that it expects "this sort of ruling to appear over and over again," though in most cases "the lender will end up retaining significant legal rights once the paperwork is properly amended."
The ruling is an effective rejection of the industry's fallback defense on botched securitization procedures. The American Securitization Forum and numerous securitization attorneys working for the industry have argued that evidence of intended transfers of a mortgage are sufficient to demonstrate legal standing. The Massachusetts high court disagreed.
The case, Ibanez vs. U.S. Bank, has been closely watched because banks have routinely argued that pooling and servicing agreements allowed them to convey mortgages to securitized trusts "in blank," or without specifying who the new owner of the mortgage would be.
The court ruled that the banks could not submit documents after filing for foreclosure and that they failed to show they were the holders of the mortgage at the time of foreclosure.
"There must be proof that the assignment was made by a party that itself held the mortgage," Justice Ralph D. Gants wrote. "The plaintiffs were not the original mortgagees to whom the power of sale was granted; rather, they claim the authority to foreclose as the eventual assignees of the original mortgagees."
Grants also wrote "that a conveyance of real property, such as a mortgage, that does not name the assignee conveys nothing and is void; we do not regard an assignment of land in blank as giving legal title."
Perplexingly, the American Securitization Forum issued a press release hailing the court's ruling as upholding the validity of assignments in blank. A spokesman for the organization could not be reached to explain its interpretation.
The shares of U.S. Bancorp and Wells Fargo slid on news of the ruling even though as trustees, they did not have a direct financial stake in the outcome of the case.
U.S. Bancorp said in a statement Friday that the judgment "has no financial impact" on the Minneapolis company. "As trustee, U.S. Bancorp has no responsibility for the terms of the underlying mortgage or the procedure by which they were transferred to the trust and has no ownership interest in the underlying mortgages."
Wells Fargo said that it did not believe that the ruling would "prevent foreclosures on loans in securitizations," according to a statement released late in the day. But it distanced itself from the case, highlighting its limitated role as a trustee.
"The loans at issue in the court's ruling were not originated, owned, serviced or foreclosed upon by Wells Fargo," the company said. "Wells Fargo expects the entities who service these loans to abide by all applicable state laws."
American Home Mortgage Servicing, the servicer for both the loans, said that the problems seized on by the court were of limited scope and unrelated to its handling of the loan. "The challenged foreclosures were conducted by a prior servicer," the company said.
In the ruling and a concurring opinion, the judges made clear that they were not taking issue with securitization in and of itself. Rather, they were faulting the sloppiness with which it had been carried out, and left open the possibility of fixing it.
"There is no dispute that the mortgagors of the properties in question had defaulted on their obligations," wrote Justice Robert Cordy in a concurring opinion joined by another judge. But the legal standard to foreclose is higher than simply demonstrating that, he added: "Before commencing such an action … the holder of an assigned mortgage needs to take care to ensure that his legal paperwork is in order."
Joshua Rosner, managing director at the research firm Graham Fisher & Co., Inc., said the ruling appears to leave some room for banks to go back and correct mortgage assignments as long as they do so prior to initiating a foreclosure.
"It appears that foreclosures already in process are those at risk from this ruling," Rosner said.
Borrowers who were foreclosed on a year ago may have some legal remedy, he said. "The borrower could sue, but I can't imagine they would get the house back if they defaulted."
Still, the outcome of the case "will increase lawsuits by investors, particularly if there is a pool of loans geographically concentrated in Massachusetts," Rosner said.
